Credit crunch takes bite out of market for second mortgages

Think it's tough to find a loan for a new house? Try getting a second mortgage on the house you already own.

Such loans seem to be an endangered species, professionals say. "They're disappearing as we speak," said Andre L. Mitchell, the executive vice president of Lynx Mortgage Bank in Westbury, N.Y.

Mitchell says lenders are balking at most second mortgages, also known as home-equity loans, because they suddenly appear too risky for most investors who would be candidates to buy packages of these loans. "When someone runs into financial trouble, the first thing they're not going to pay is the second mortgage," he said. "And if you're second in line as a lender, good luck trying to foreclose."

To get second mortgages, borrowers must clear significant hurdles. Jeffrey Guarino, managing director of Gotham Capital Mortgage, a Manhattan brokerage, said a successful applicant must maintain a "prime" credit score of 700 or more on a scale that typically runs from 300 to 850, and after the loan has been taken out, the equity in the house must still exceed 10 percent of the property's value.

Lenders are also demanding that applicants prove they have enough money saved to carry them through six to 12 months of payments, Guarino said, although these reserves can be in retirement accounts or other nonliquid assets.

Once borrowers clear those hurdles, they face something that many people with good credit have not seen in years: double-digit interest rates.

"It is not uncommon to get a 10 percent interest rate for a fixed-rate second mortgage right now," Guarino said. "A year ago, you could get something in the 7 percent range."

Second mortgages, which in recent years came in a wide variety of flavors, are back to one: plain vanilla. "Last year," Guarino said, "you'd see interest-only mortgages, 20-year loans, 40-year loans due in 30, adjustable-rate loans. Now, things are more in the 30-year fixed category again."

The relative dearth of second mortgages coincides with a slowdown in piggyback loans, which are taken out at the time of a home purchase.

In these transactions, borrowers make a down payment of, say, 10 percent and then take a second mortgage on the property for another 10 percent of the home's value. That approach spares borrowers from paying for dreaded private mortgage insurance, which lenders require when a borrower's equity falls below 20 percent of the home's value.

Late last year, President Bush signed legislation allowing borrowers with $100,000 or less in annual household income to deduct mortgage insurance premiums from their income taxes. After that, and with the credit market tightening, lenders saw a drop-off in piggyback loans, although they remain an option for very highly qualified borrowers who can make a down payment of at least 5 percent.

Mortgage executives say that for most borrowers, the only way to take equity out of your home now is a home-equity line of credit, which always carries an adjustable interest rate.

Even those loans have recently grown more expensive, though - and not just because their interest rates are typically tied to the prime rate, which has jumped in recent years. Now banks are charging interest rate premiums of a percentage point or more above the prime rate.

Those seeking the safety of a fixed-rate second mortgage should hurry, said Mitchell of Lynx Bank. "If you can get it, close it," he said. "Tomorrow it may not be there."